Raymond Henney: So our final presentation has to do with securities
arbitration developments. And we’re very pleased to have this distinguished panel of our FINRA representative, Felicia Fox. Who is a senior attorney with the Department of Arbitration. Gary Saretsky, who is a very prominent, mostly defense-oriented practitioner at his firm Saretsky, Hart, Michaels & Gould, and finally, sort of the dean of the
claimant’s bar in the arbitration field Joe Spiegel, Joe.
Joseph Spiegel: Here.
Raymond Henney: Oh, he’s sneaking up behind me.Two things, the
Cubs are ahead. Which is very important. Secondly, Anthony Troven, passed way in March. One of his real passions was the Michigan State
College of Law Securities Clinic. And, what I’d like to introduce to you, and what we’re going to try and do over the, you know, next six to
twelve months because FINRA stopped funding the clinics all over the
county, we are going to try and get funding for the clinic, and we’re
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going to attempt to have it called the Michigan State College of Law Anthony B. Troven Jr. Securities Clinic. And, if you want any information about that I will be working with Gary Saretsky and a
number of other practitioners. It’s been a fabulous program, and the
students loved it. It really gives them a leg up in getting a job.
Gary is going to talk about elder law issues, and then Felicia is going to talk about FINRA issues.
Gary Saretsky: Hi everyone. Elliot, thank you, for having me. Ray,
thank you, appreciate the opportunity. It’s kind of refreshing for us. For
Joe, Felica, and I, to follow the litigation development group, that they take always such a very scholarly approach to securities litigation. Our topic of course is securities arbitration work and securities arbitration is,
I think, probably by virtue of my personality and Joe’s personality has
become kind of the ugly stepchild or the rebel section of the securities law seminar that we have. Because, as we all know, the law doesn’t
apply in theory in arbitration so what are we doing at the Midwest Securities Law Institute? I’m not really sure about that, nonetheless,
since most securities disputes are resolved in arbitration it seems very important to us to have a voice here. Between Tom and Rocky and Marc, you heard some terrific practitioners talking about developments.
I’m going to spend a little time talking about elderly investors or senior investors. There’s a FINRA conference in Washington D.C. going on right now, dealing with elderly investors. Felicia is going to talk about FINRA arbitration rules, developments, and proposals. Joe is going to take a couple of hot topics. He is going to talk about the supervision of registered reps and customer accounts by the securities industry and the
impact of the Department of Labor’s new fiduciary duty rule. So, as I
was preparing for my presentation, one of my favorite associates, Max Emmeritt, came in the office to talk to me and he said, “What are you working on?” and I said, “I’m working on this elderly investor thing.” And Max said, “Well, I’m really sorry that someone took advantage of you Gary.” And I just want to say, Max, I’ll never forget that. Thank
you so much for that compliment.
So, who is an elderly investor? And the answer is you look to state law
to see who an elderly investor is. In the upper left hand corner you’ll see that there is a Michigan civil statue, there’s a Michigan criminal statute
that defines what an elderly investor is, but in the center of the slide you
see the common themes are typically it’s an investor sixty to sixty five
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years old, who is venerable and subject to abuse, for one reason or another. It may be due to a physical infirmity, an emotional disability, but the common theme is that there is the exploitation of a vulnerable person, an elderly person, and the law seeks to protect people from that. So, is sixty to sixty five years old elderly? Anyone here want to guess what percentage of people sixty five and older use social media? Any guess? 10, 20, 30 percent?
Audience Member #5: Seventy percent.
Gary Saretsky:It’s close to 60%. More than 60% of people sixty-five and older are on Facebook. So, my first provocative question for you is, are our laws, which are obviously well-intended, outdated? Is sixty to sixty five truly older? Now the PEW research center did a survey and they made a determination of when old age begins. Anyone want to guess when old age begins?
Sixty Eight. So, we have a situation where we have an aging population, well-intended laws, intended to protect them, but we might need to rethink how old an elderly investor really is. What is elder abuse? Comes in many forms. Physical, emotional, neglect, it can be
abandonment, but what we’re talking about here is exploitation. The
taking and misuse of property, the concealment of funds or assets. Why are the elderly subject to abuse? There are frequently a combination of factors, again as I said, it could be declining health, but largely it deals with mental. Cognitive impairment, dementia and preying upon older people because of their fear of economic dependence. Why is financial
exploitation such a concern? I think that this kind of reveals what’s
going on in our lives and what the reality is. The average life expectancy in 1776 was thirty-five. Today for a child born in 2016 the average life
expectancy is eighty years old. So, what’s really interesting is when you look at this chart here, you’ll see that in 2013 we had 44.7 million Americans that are sixty-five or older. By 2060 that number will more than double to ninety-eight million. Of course, because women have the good fortune to live longer than men, more of older people will be women, and by the time we look at the population of eighty-five and
older that’s expected to triple in the next two generations.
So, we have a much older population, we need only look at our presidential election this year to illustrate that point. Donald Trump, if elected would be the oldest president ever. Hillary Clinton if elected, would be the second president oldest president ever. And, no one has
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made a serious challenge to their mental faculties or their physical stamina. I said serious challenge. Emphasis on the word serious there without tipping my hand. We have a problem. We have an aging population, our elderly have better healthcare and are living longer. Yet, we have well-intended laws, and of course FINRA out there, seeking to protect the interest of investors. So, I think one of the interesting things,
and we’ll talk about it a little bit more as we go along, the interesting
thing is that FINRA, of course, seeks to protect elderly investors by providing elderly investors certain opportunities. Felicia, do you want to touch briefly on how FINRA seeks, in the arbitration venues, to protect the elderly?
Felicia Fox: Sure, thanks Gary. We started in 2004 a program to help expedite cases for elderly and seriously ill investors. And we have been improving upon that every year since. Even the task force that was one of their recommendations that we again re-visit that, and we are continuing to do so. So, I see this as a three-prong approach in processing these cases. So, we have what can staff do, what can arbitrators do, and what can parties do to help move these cases along. So as far as staff, we try and handle cases as soon as possible. We get the list out to parties faster. We encourage the parties to return them faster. We give the arbitrators less time to respond and accept the cases, all in the hope of handling the cases faster from the get go, and that will spur things along. Parties, we give parties options that they can stipulate to that will further expedite the case. They can agree to dates, they can agree to only have arbitrators who are available on those dates. Various other options that parties can select. As far as arbitrators, arbitrators are encouraged to schedule the cases faster, to have these cases heard within six months of the initial pre-hearing conference, which is faster than for a normal case where we recommend nine months. We also encourage arbitrators to select discovery deadlines that will expedite the matters and return rewards in all decisions faster, as well as, using the portal, and electronic means to deliver those orders for us. So, we can get those out to the parties faster.
Gary Saretsky: So FINRA by its words and conduct, its rules and policy, is encouraging its arbitrators to be sensitized to the needs of senior claimants, to press for expedited hearings and there is now a FINRA hotline for senior investors. All of these are positive
developments, because it’s important to protect and care for the elderly.
So, I ask you what is the average age of a FINRA arbitrator? Who would like to guess?
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Audience Member: Seventy.
Gary Saretsky: Sixty-nine, Michael. So, the very people that we’re
asking to protect the interest of investors might have an interest in
protecting those investors. I don’t know what the percentages are but I’m guessing there’s not a very high percentage of twenty to thirty year old
FINRA arbitrators. I haven’t run across many.
Raymond Henney: Gary, with respect to FINRA, depositions are really discouraged, except in these types of cases. You can have a deposition at a nursing home, you can have a deposition to preserve testimony, especially with what I call super seniors, anybody over eighty, anybody out of ill-health, and the arbitrators have been sensitized to allowing the preservation of testimony.
Gary Saretsky: Good point. And law enforcement has become increasingly more protective of the elderly, this slide illustrates what the
FBI’s thinking is. Senior citizens are especially vulnerable because they have nest eggs, they’re polite and trusting according to the FBI, they’re
ashamed to admit that they’ve been scammed or taken advantage of, they may be poor witnesses, and they may be susceptible. Joe, you’ve had
some involvement recently in criminal prosecutions regarding scam
artists, haven’t you?
Joseph Spiegel: The State of Michigan has become very aggressive on prosecuting what we would call scam artists or people engaged in criminal activity. Simply because of taking advantage of what we call seniors, unsophisticated individuals, and the penalties, the criminal penalties range anywhere from three or four years up to nine or ten, or even twelve or fifteen years in prison. One person got twenty years. One
of the things that I think people don’t realize is the amount of money, the
trillions of dollars that are being held by people who are over sixty-five to eighty years old. And you will find as a practitioner, when someone
comes into your office, that’s a super senior, you have to have the talk.
And the talk is a very difficult talk, have you told your children, about this problem. And it’s been my experience, and it was Tony’s experience
too, 99%, no. The super seniors have not told their children what has
happened or what’s going on in their financial lives. So, I’m going to
throw it back to Gary. What would you advise a broker dealer, RIA, or a
broker when they’re confronted with these problems?
Gary Saretsky: Well, we’ve suggested a number of best practices for
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brokers and brokerage firms, I’m going to skip forward. Joe was just
going to ask if you wanted to talk about, for example, Ponzi schemes, as a common type of financial fraud situation.
Joseph Spiegel: Ponzi schemes are the most prevalent where there is criminal charges. And, they are both under securities fraud and under racketeering. And, generally speaking, there are certain elements. There is an affinity, a group, a religious group, a social group. Next, thing you have is someone who started out possibly thinking it was going to be
okay, suspending disbelief. All of a sudden, he’s taking from one pot,
and in addition they are lining their own pockets, and I think that’s
probably one of the key factors. The analysis by the state investigators, the FBI, and the SEC is invaluable in the prosecuting of these individuals. Once that threshold of, not just the misrepresentations, but
the lining of their own pockets at the expense of the victims, it’s
incredibly important to the juries that hear these cases, and the juries are very sensitive to the abuse of these elders. And their testimony is very compelling. But again, it is something that starts possibly in real estate, or promissory note cases. Where someone may start with a thought that it
could be okay, and all of a sudden it spins out of control, and they won’t tell anybody, and all of sudden the money’s gone.
Gary Saretsky:Joe, I’m going to answer your question because it was a
very good question. I just want to give the context to the question, though, because brokers and brokerage firms become unwitting tools in abuse committed by, frequently, known and trusted friends or family members. And this relationship of trust and confidence can serve to disarm a person. And, so, we defending brokers and brokerage firms, run into familiar situations, where there are powers of attorney that are presented to us, giving a family member, a trusted friend the ability to control an account, or a trustee designation, a letter of authority, something like that. So, Joe asked, what can and what should brokers be doing? What they should do is really adopt a policy of stop, look, and listen. Stop thinking about accounts of the elderly as requiring the same type of oversight and supervision that you would give to any account,
because it’s not only humanitarian, it’s not only appropriate, but it’s the
law at this point, that the interests of the elderly be watched carefully. Flag the accounts of the elderly. Know the senior customer, his or her family circumstances, etc. Look for the warning signs. The warning signs include, physical deterioration, cognitive deficits, changes in behavior, or living conditions. That, in and of itself, is a great thought and approach, but you should stop and ask yourself, as we do the securities industry, are
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we really trained, educated, qualified to be making physical assessments of people, physically and cognitively? It’s a tough question. And then
finally you need to, the industry needs to listen to customers. Listen to family members and listen to what the customer, the senior is looking for
and wants. There are a number of red flags. We’ve already, kind of,
briefly touched on these, but where you have a broker, who’s a
beneficiary of an elderly customers account, or a broker is serving in a functioning in a dual and conflicting capacity, for example as not only the broker of record, but also, you know, serving as, you know, a trustee, an authority over the account.
What is FINRA doing beyond? There are a number of proposals. I
encourage you to look at, I don’t want to monopolize the time that we
have. I want to give Felicia and Joe an opportunity, but I want to just briefly touch upon some developments. FINRA notice to members 15-37 references two different rule amendments that have been proposed. An amendment to rule 4512 which would essentially allow firms . . . excuse me, a senior to designate a contact person and that trusted contact person
would not be obligated to, but could, report incidents of abuse. So that’s
a positive proposal, and if handled well it can protect senior investors. The other rule proposal, 2165, this would effectively encourage a qualified person, such as a brokerage firm supervisor, compliance officer, etc., to intervene where there is a questionable disbursement or
trade that might seem incompatible with a senior investor’s investment
objectives or risk tolerance and would permit that qualified person to place a temporary hold on a disbursement, for example, allowing further time for investigation and protection of a senior investor. NASA, which is the state securities regulators, which applies state law, has a model act proposal that model proposal goes even beyond that which FINRA has
proposed in the sense that FINRA’s proposal doesn’t obligate brokerage
firms to intervene, the model act, actually if you can see in a second, the third bullet point, key features, second point under, mandates certain reporting. So, even greater protection. And, lastly, you can see that, to date, 19 states have adopted elder laws. Four more are on track to adopt,
and it is clearly the trend. It’s clearly a development and it’s something
that all of us that care about human beings and that care about older investors need to be keenly aware of.
Joseph Spiegel?: Excellent. Felicia?
Felicia Fox: Well, thank you everybody. Elliot, Ray, thank you so much for inviting me back and to all the faculty and staff here at Michigan